Borrowing for College: Advice about Loans for Students and ParentsSuzanne Shaffer
Student loan debt has reached crisis proportions in the U.S. According to Student Loan Hero, who compiled data from three different financial sources and the federal government, the most recent reports indicate there is $1.26 trillion in total U.S. student loan debt. The number of Americans carrying this debt is 43.3 million. In addition, the student loan delinquency rate is 11.6%.
New grads beginning their professional lives aren’t the only ones struggling. The average parents borrows $21,000 for their children's higher education, and many parents and grandparents are taking on student loan debt at a time in their lives when it can negatively impact their ability to save for retirement.
Because knowledge is power, I turned for advice to an expert: author and financial aid advisor Jodi Okun. By learning more about student loans, families can advise their students about borrowing carefully in order to avoid unmanageable debt after graduation.
Here is Jodi’s counsel on the subject of student loans.
There are two types of federal student loans: the Federal Direct Subsidized Loan and the Federal Direct Unsubsidized Loan. Eligible students who complete and submit the FAFSA may be awarded these federal student loans. Ms. Okun explained, “With the Federal Direct Subsidized Loan, the government pays the interest while the student is enrolled in college. The Federal Direct Unsubsidized Loan collects interest while enrolled in college. These federal student loans for the 2016-2017 school year are set at a 3.76% interest rate.”
Private student loans should always be the last step in borrowing for college. Interest rates are higher and repayment terms are stricter, not allowing for deferment or forbearance. Families can compare lenders side by side and decide which lender is best for them. NerdWallet’s list of the 9 Best Private Student Loan Options in 2016 should help.
Being uneducated about your student loans can have dire consequences. Many students simply sign on the dotted line every year when financial aid time comes around. They don’t take the time to educate themselves before borrowing funds to pay for college. Ms. Okun advises, “Know the interest rates, repayment terms, and who your lender is! Stay on top of your student loans and don't ignore them until it is time for repayment. Take charge and be in control of how much you owe.”
The key to student loans is to be a smart borrower. Ms. Okun encourages students not to borrow more in student loans than they expect to earn their first year out of college. She clarifies: “For example, if a student expects to make $45,000 their first year working out of college, a good rule of thumb for the student is not to borrow more than $45,000 for their entire college education.” Students should also consider making small payments on their student loans during college — before they graduate and mandatory repayment begins. If the loan is accruing interest while your student is in college, they should make those interest payments as well.
Take the time to discuss the financial obligation of repaying student loans. “Use a student loan repayment calculator! Before students borrow, you can estimate monthly payments and get an idea of how big the expense will be when it comes time for repayment,” said Ms. Okun. There are many different types of repayment calculators — Student Loan Hero provides a comprehensive list.
Remember that you are not obligated to accept all the student loans offered in your student’s financial aid package. Students and families should “ask about the repayment terms and interest rates. Make sure that you do not borrow more than you need!” Ms. Okun recommends choosing the Federal Direct Subsidized Loan (the government pays the interest while the student is enrolled in college) over the Federal Direct Unsubsidized Loan which accrues interest during college.
Ms. Okun wisely advises to “know when you are expected to start repayment, know if your student loan will collect interest while you are in school, and know if there are student borrower perks” (for example, a cash-back reward for students who maintain good grades). Be a wise consumer, compare rates and consider whether your student will be able to meet the repayment terms.
With the cost of college rising, many families borrow money to pay for college. Federal student loans can help students supplement the difference between the EFC (Expected Family Contribution) and the amount of financial aid the college provides. The key is to only borrow what you can repay without hardship.
If you have a college student graduating soon, or a recent grad with student loan debt, share this helpful information from U.S. News about loan refinancing and consolidation. Click here to read the guide.